Japan is starting to pick up pace in digital transformation projects. This is increasing efficiencies in the country’s workplace and leading to many hidden gems for investors, says Sophia Li (pictured), portfolio manager at FSSA Investment Managers.
Despite concerns about global cost inflation, companies with a dominant market share, strong pricing power and a continual ability to innovate in their business model or product offering should be well positioned to grow.
With these factors firmly in mind, we believe there are significant opportunities in the automation and digitalisation sectors. These industries are well positioned for secular growth regardless of the prevailing macro situation, while also being likely to benefit from certain demographic trends in Japan and around the world.
Japan has one of the oldest populations in the world, and has been planning for a future with fewer workers and more retirees for some time. Today, Japanese companies make more than 50% of all industrial robots and computer-controlled systems globally.
With the continued advancement of technology comes greater opportunities to automate processes, improve productivity and free up human capital for higher-level activities. No longer just the preserve of the manufacturing industry, we now see robots in the healthcare, agribusiness, logistics and retailing sectors, to name just a few.
Japanese companies like Keyence, which makes sensors, laser markers and machine vision systems, and SMC Corp, the world’s largest manufacturer of pneumatic components, have been at the forefront of this automation trend.
Digital transformation is accelerating
Japan is starting to pick up the pace in digital transformation projects, which use technology to improve efficiencies in the workplace. There are many hidden gems in the underpenetrated and emerging industries in Japan – such as Software-as-a-Service (SaaS) companies – which are often under-researched by the market.
Cloud-based services such as Rakus’ expense management software help employees in small and medium-sized enterprises save significant time and labour costs. This software can be accessed anywhere and at any time – particularly useful during a health pandemic where citizens have been working from home.
Meanwhile, a shortage of skilled information technology (IT) engineers in Japan has resulted in an inefficient multi-subcontracting structure. IT departments often employ external systems integrators and IT consultants who control the core system, and they can be locked in to subordinate vendors with costly long-term contracts.
Shift, an IT services company, aspires to revolutionise Japan’s IT industry by solving these issues. Since 2014 the company has been building trusted client relationships through its software testing business, and it helps corporate management improve technology project governance by separating the vendors responsible for planning, development and quality assurance.
In future, a significant secular growth in digitalisation is expected. While penetration of the SaaS industry is around 45% in Europe and more than 50% in the US, it is still less than 20% in Japan because employee IT literacy is still very low. Additionally, Japan’s under-investment into technology means firms may soon face the so-called “2025 Digital Cliff” – a shortage of people in IT. This means there’s a long runway of growth for future spending on IT services in Japan.
Amid concerns about slower economic growth and labour productivity, we believe that automation and IT services firms that tackle these issues head on can be a good hunting ground for investment opportunities. Moreover, the challenges associated with an ageing population are not limited to just Japan – governments are facing similar issues all over the world, leading to increased investment into research and development (R&D) on robots and technology.
Japan’s experience in this area may well prove useful to other countries in the future, as companies seek to automate processes and replace labour-intensive functions with machines.
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